I am the founder and CEO of Arete Wealth Management, LLC an independent boutique broker-dealer and investment advisory firm. I've been in the investment advice business for 11 years. Previously, I was an inventor with Walker Digital in Stamford, CT -- the intellectual property studio that started Priceline.com.

5 Investment Lessons I Picked Up Turning Garbage Into Clean Energy

Is “sustainability” a good long-term bet for mankind? My colleagues, clients and I have millions of dollars riding on it.

We do all kinds of investing. But my colleagues and I at Green LLC and Arete Wealth Management started investing in clean tech three years ago. We wanted to make solid investment returns and score a win for the environment too. Though the amount of money we’ve put up is an incredibly small fraction of the $2 billion plus of investment dollars Arete touches, we’ve spent an outsized amount of time and energy performing due diligence. Of the 30 plus clean-tech deals we’ve found that appeared worthy of serious consideration, we’ve only invested in one so far, in Glendale, Ariz. There, the company we invested in, Vieste Energy, is planning to convert recycled waste into electricity.

Along the way, we’ve had some stressful moments. And we’ve learned a few interesting lessons. Though some are especially apropos to waste-to-energy projects like the one we’ve invested in, for the most part I think these apply to any kind of clean-tech investment.

(Photo credit: Wikipedia)

1) The technology is far less important than securing inputs and outputs. Our team studied a number of clean-tech companies and projects that failed or underperformed. To our surprise, we discovered the technology wasn’t much of a factor in the failures.

It turns out what kills you in clean-tech is failing to secure a rock-solid source for your fuel and buyers for your energy. It’s a chicken-and-egg problem faced by all kinds of green energy projects. For instance, before you can invest the huge capital cost involved in setting up a wind farm or a solar farm or a waste-to-energy plant, you have to secure a long-term power purchase agreement, usually from a utility. This is not easy at all. The utilities want to buy power from the cheapest possible sources. In most cases, renewable sources are not yet as cheap as fossil fuels.

On the input side, securing long-term waste supply contracts is also very difficult. Wind farmers know the wind doesn’t always blow, and solar farmers know the sun doesn’t always shine, of course. But I was surprised to discover how tricky it can be to get a steady supply of waste. In many situations around the country haulers make more money by just dumping all of your waste into landfills than by doing something productive with it—pulling all of the recyclables out first, for example.

Anyway, the key to successful investing in this space is not necessarily about the coolest new technology. It’s about the ability of the developers to secure those contracts. Without them, they can’t even purchase the technology in the first place.

2) It’s better to invest without government help. The fact is, green projects need to compete in a brown world. Government can tip the scales a bit, but its policies are obviously capricious and prone to change. When we look at investing our own capital and other people’s capital into anything in the clean tech space we want to be able to control as many risk variables as possible. In my view, you don’t want to invest in a company where the financials only pencil out as long as there is a government tax credit or subsidy in place.

We looked hard at investing in the advanced bio-fuels market. One of the things our due diligence showed is that many U.S. bio-fuels manufacturers would be very unprofitable if the blenders tax credit were not in place. Sure, I think it’s likely that the tax credit will be extended. But we didn’t want Congress to decide whether our investment would profit or not. So we prefer to invest in green technologies that can compete effectively head-to-head with existing brown technologies. If the government wants to put a little wind at our backs, then that’s just faster sailing.

3) Think beyond electricity as the only energy output. When people hear “green energy” or other, similar terms they immediately assume that the energy output is electricity. But that doesn’t need to be the case.

In fact, because of the closed monopolistic system of utilities operating in the majority of states, it’s wise to think outside the 120-volt box. Consider other possible energy outputs.

For example, there’s “green” natural gas. You can create it by taking wet organic waste from a municipal waste stream and putting that into an anaerobic digestion plant. An existing Environmental Protection Agency rule called “RFS II – aka the renewable Fuel Standard” obliges large integrated fuel producers like Exxon and BPBP to buy a certain percentage of their total volume of oil and gas from renewable sources. It turns out that it’s much easier to get better pricing and long-term off-take contracts for this type of energy output.

My point is that you should yank off your blinders and avoid focusing exclusively on electricity.

4) Even the most revolutionary clean technologies struggle for financing. It’s not easy to raise equity money into clean tech projects. It’s even harder if you have to raise more than 30 percent of the total project cost in the form of equity. And say you want debt financing either through the major banks or through the bond markets of anything greater than 50 to 70 percent, and your technology is new and relatively unproven…that’s impossible.

It may be the case—in fact, it is likely the case—that the newest clean technologies are even more efficient and cleaner than anything in operation today. But that doesn’t matter to banks or bond investors. The technology must have a proven track record over a long period of time. You can grumble all you want about the U.S. always being 20 years behind the technological curve in clean tech. But you have to accept that what’s best doesn’t matter. All that matters is what’s financeable.

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